Although it will be up to an in-agency judge to determine exactly what laws have been violated, if any, and what the penalties will be, the Consumer Financial Protection Bureau (CFPB) has initiated an administrative, or non-judicial, proceeding against PHH Corp. and its affiliates alleging that the company engaged in a mortgage insurance kickback scheme that started as early as 1995.
According to the CFPB, an investigation launched by the Office of the Inspector General at the U.S. Department of Housing and Urban Development (HUD) in July 2011 revealed that when PHH originated mortgages, it referred consumers to mortgage insurers with which it partnered – a violation of the Real Estate Settlement Procedures Act (RESPA). In exchange for this referral, these insurers purchased "reinsurance" from PHH's subsidiaries, Atrium Insurance Corp. and Atrium Reinsurance Corp.
HUD's authority over the case was later transferred to the CFPB.
The CFPB alleges that these reinsurance fees were, in essence, kickbacks and that consumers ended up paying more in mortgage insurance premiums as a result.
It is alleged that from the start of the arrangements, and continuing into at least 2009, PHH manipulated its allocation of mortgage insurance business to maximize kickback reinsurance payments for itself.
The CFPB claims that PHH set up a system whereby it received as much as 40% of the premiums that consumers paid to mortgage insurers, collecting hundreds of millions of dollars in kickbacks.
In some cases, PHH charged more money for loans to consumers who did not buy mortgage insurance from one of its kickback partners, the bureau says. This was achieved by charging the consumers additional percentage points on their loans, the bureau says.
The CFPB further alleges that PHH pressured mortgage insurers to "purchase" its reinsurance with the understanding or agreement that the insurers would then receive borrower referrals from PHH.
What's more, the bureau says PHH continued to steer business to its mortgage insurance partners even when it knew the prices its partners charged were higher than competitors' prices.
As per a CFPB press release, an administrative law judge from the bureau's Office of Administrative Adjudication, an independent adjudicatory office within the bureau, will rule on the case. The judge will hold hearings and make a recommended decision regarding the charges, which may be appealed to the director of the CFPB for a final decision.
In its release, the bureau points out that its administrative proceedings are similar to those of other federal regulators, including the Securities and Exchange Commission, the Federal Trade Commission, and prudential regulators like the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.
The bureau reached settlements in 2013 with five other mortgage insurers who were accused of participating in similar schemes. In November, the CFPB announced that it was fining Republic Mortgage Insurance Corp. (RMIC) for allegedly paying illegal kickbacks to mortgage lenders in exchange for business.
In April, the bureau brought similar actions against four other mortgage insurers, including Genworth Mortgage Insurance Corp., Mortgage Guaranty Insurance Corp., Radian Guaranty Inc. and United Guaranty Corp.
The CFPB notes that its Notice of Charges is not a finding or ruling that the defendants have actually violated the law. The bureau's Rules of Practice for Adjudication Proceedings provide that the CFPB may publish the actual Notice of Charges 10 days after the company is served.
The CFPB is seeking a civil fine, a permanent injunction to prevent future violations and victim restitution in connection with the case.